Co-authored by Mr Carlos María Fariña & Ms Mariela del Carmen Caparrós
On May 16, 2002, the Argentine Congress returned to tinkering with the Bankrutpcy Code.1 In February we informed you of a set of pro-debtor amendments, most of which survived the president's line-item veto.2 The latest set of amendments, reported to have been prompted by the government's desire to obtain International Monetary Fund support, reverses or mitigates many of the February amendments to the Bankruptcy Code.3 This edition of Argentine Business Law Watch reports on those amendments directly affecting holders of corporate bonds. The text of the amendments can be found at http://infoleg.mecon.gov.ar/txtnorma/74331.htm.
The Unbearable Lightness of Being a Bondholder
In the heyday of corporate issues, the government amended laws to imbue holders of bonds qualified as obligaciones negociables (negotiable obligations) with specific rights to assure transferability and rapid judicial resolution of claims for nonpayment. The instruments worked well until tested in an insolvency context. By the late 1990s, as issuers were defaulting on their obligations and forced to seek insolvency protection, it soon became apparent that bondholders enjoyed far less protection of their claims than originally thought.4
One significant hurdle confronted by bondholders has been to "verify", i.e. have their claims admitted by the bankruptcy trustee. Bankruptcy courts have generally required bondholders to present certificates to prove the debt, though refusing to accept certificates of ownership furnished by the clearing systems, which the courts have considered insufficient to "authenticate" the debt. This has left bondholders with interests held in electronic book-entry form (nearly the entire universe) in a Catch 22 in which they need to obtain certificated notes from an issuer that has no interest in helping speed along the process.
A second obstacle encountered by bondholders has been debtor and bankruptcy trustee opposition toward accepting the bondholder trustee or fiscal agent (which we will refer to as the "Bondholder Representative") as a credible representative of the bondholders. While the bankruptcy courts have generally accepted the Bondholder Representative, in one recent reorganization proceeding, the court was sufficiently convinced by the debtor to allocate the Bondholder Representative with one vote (rather than as many votes as are represented by the Bondholder Representative) on a repayment proposal based on the dubious reasoning that the Bondholder Representative was unable to adequately identify the individual bondholders.
For these and other reasons, the figure of a Bondholder Representative has been a focal point of contention between issuer and bondholders in the insolvency context.
The Bankruptcy Code Amendments:
Partial Suffrage Last month’s amendments include several provisions affecting bondholders and holders of other securities involved in an issuer's reorganization proceeding:
- The proof of claim can be filed by the Bondholder Representative.
- The court must accept the Bondholder Representative’s authority as established by the relevant agency agreement, trust deed or indenture.
- The Bondholder Representative’s acts need not be ratified by the bondholders nor shall the Bondholder Representative be required to produce a power of attorney from the individual bondholders to act on their behalf.
- In a reorganization proceeding, bondholders shall accept or reject the debtor's proposal by a special meeting convened by the Bondholder Representative or as otherwise provided in the relevant agency agreement, trust deed or indenture.
- The Bondholder Representative shall advise the court on the resolutions adopted by the bondholders.
- Majorities will be calculated based on the aggregate amount of the bonds, although for purpose of considering creditor approval, votes will be consolidated so that the trustee will be entitled to cast one vote on behalf of all approving creditors and one vote on behalf of all dissenting creditors.
The Amendments in Context
The May 16 amendments clearly strengthen the figure of the Bondholder Representative in the insolvency context. No longer shall the Bondholder Representative’s authority to act on bondholder behalf be challenged or delayed. Significantly, the amendments resolve favorably for the bondholder the authentication of a proof of claim through the Bondholder Representative.
Unfortunately, the amendments fail, in our opinion, to redress adequately the critical matter of computing creditor majorities at the time a reorganization plan is submitted to vote. The amendments, which consolidate the bondholders’ voting into one affirmative or one negative vote, assure that bondholders will continue to be under-represented. As if that were not enough, our reading of the statute indicates that the vote taken at a meeting will almost always be neutralized, as anything other than unanimity requires the Bondholder Representative to cast one favorable and one dissenting vote on the proposal.
As a practical matter, what can a bondholder do? At this juncture, pending further amendment or modification, it would appear that the bondholder’s only viable course of action to assure itself a vote would be to file proof of claim separately from the Bondholder Representative. Of course, even then the Bankruptcy Code continues to give only vote to each creditor, regardless of the amount of the claim.
1 "Bankruptcy Code" refers to Law 24,522, as amended and codified.
2 The February amendments were enacted as part of Law No. 25,563. The May 16 amendments were enacted as Law 25,589.
3 Among the most significant of the current amendments are the unwinding of certain preceding amendments enacted in February. Provisions repealed by the May 16 amendments include the stay on a creditor's ability to prosecute a bankruptcy petition , the elimination of the cram-down proposal, and the limiting of a guarantor’s liability to that of the debtor’s restructured obligation. In addition to the foregoing unwinding of the February amendments, the May 16 amendments extend the binding effect of a non-judicial work out agreement entered into by sufficient minimum majorities of creditors to non-assenting creditors.
4 Three recent reorganization proceedings (In re Central Términal Güemes S.A.; In re Supercanal S.A. and In re Sociedad Comercial del Plata S.A.) have illustrated the difficulties of bondholders encountered to prove claims and be represented by a bondholder trustee or fiscal agent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.